Probate versus Estate Tax: My wife is sole beneficiary of my IRA. Will the IRA be included in my taxable amount for Estate Taxes or will it go directly to her.


Great question. This is a concept that confuses far too many taxpayers. There are different types of "estates". You have a "probate" estate. Your probate estate is comprised of the assets that pass under your will, or through the probate process. An asset like an IRA that has a beneficiary designation, will not pass through probate. In fact, for many people, so many or even all of their assets avoid probate (e.g., IRA with a beneficiary designation, life insurance passing to a named beneficiary, joint bank account, house co-owned with another person as joint tenants with rights of survivorship).

The second "estate" you have is your "taxable estate". You can have nothing in your probate estate and still have a huge taxable estate. Every asset mentioned in the preceding paragraph is part of your taxable estate even though not included in your probate estate.

The situation you describe can create a host of problems. The major issue is confusion which makes it hard to plan. So for you, even though your IRA is not part of your probate estate and it will pass directly to your wife (based on what you stated) it will be included in your taxable estate. If your estate will pay estate taxes (e.g. your wife dies before you and the IRA goes to children), who will pay the tax? It becomes difficult to fairly allocate estate taxes when you have assets passing through the estate but large assets that create a tax cost passing outside the estate (i.e., where the executor cannot reach them). In your case, there should be no estate tax on your wife receiving your IRA because of the unlimited estate tax marital deduction (this won't apply if she is not a U.S. citizen).

Sorry its all so complex, but that is why you really need to review this all with an estate planning specialist. Further, if your state has an estate tax, you should address those nuances as well.

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